The short answer
Rev. Rul. 2004-86 is the 2004 IRS ruling that a Delaware statutory trust whose trustee has no power to vary the investment is a grantor trust, so each investor is treated as owning an undivided fractional interest in the trust's real estate and can acquire that interest in a section 1031 exchange. It is the reason a DST interest is not treated as a certificate of trust or beneficial interest, which section 1031 otherwise excluded at the time. The price is a short list of things the trustee may never do, and a trust that gains those powers becomes a partnership.
At a glance
| Published | Internal Revenue Bulletin 2004-33 |
|---|---|
| Classification | Investment trust taxed as a grantor trust, not a business entity |
| Exchange result | Investor treated as owning an undivided fractional interest in the real property |
| Breaking point | Any of five listed trustee powers turns the trust into a partnership |
The ruling turns on one test: whether the trustee can vary the investment.
In Rev. Rul. 2004-86, A buys a net-leased property, Blackacre, with a 10-year nonrecourse loan and contributes it to a Delaware statutory trust. B and C then exchange their own properties, through a qualified intermediary, for all of A's interests in the trust.
Under Reg. section 301.7701-4(c)(1), an investment trust with a single class of interests is a trust only if there is no power to vary the investment. Because the loan and lease were fixed before the trust began, cash had to be distributed quarterly and reserves could be invested only in short-term government obligations or bank certificates maturing before the next distribution, the IRS found no such power.
B and C are therefore grantors under sections 671 and 677, each treated as owning an aliquot share of the trust, and so each is considered to own an undivided fractional interest in Blackacre. Their exchange was real property for real property, not for a beneficial interest excluded by section 1031(a)(2)(E) as it then read.
The ruling lists five trustee powers that would end the result, and the facts add two more limits.
The ruling says that if the trustee could do any of the following, the trust would be a business entity, classified as a partnership if it has two or more owners, and could not elect out of subchapter K. The familiar shorthand of seven prohibitions adds to these five the bar on new contributions and the cash-distribution and reserve rules from the ruling's facts; see the DST seven deadly sins.
- Dispose of the property and acquire new property.
- Renegotiate the lease or lease to new tenants, except on the tenant's bankruptcy or insolvency.
- Renegotiate or refinance the acquisition debt.
- Invest cash to profit from market fluctuations.
- Make more than minor non-structural modifications not required by law.
It bites when a property needs capital or a new lease and the trust cannot provide either.
Hypothetically, a DST owns a single-tenant building whose tenant leaves at lease end. The trustee cannot sign a replacement tenant or refinance without breaching the ruling's limits. How a given trust handles that event is set by its own offering documents, so read them with your adviser before you invest; see the DST springing LLC.
For how the ruling feeds into qualification and ownership, see DST like-kind qualification and what you own in a DST.
Related questions
Does the ruling mean every DST qualifies for a 1031 exchange?
No. It addresses a trust on the facts it describes, and only if the other requirements of section 1031 are satisfied. A trust whose agreement grants any of the listed powers falls outside the result.
Does it matter that the DST has a mortgage?
Not in itself. In the ruling the trust holds property subject to a nonrecourse loan, and the beneficial owners are not personally liable on it; what matters is that the trustee cannot renegotiate or refinance that loan.
Why can a DST not simply raise more money from investors?
The trust agreement in the ruling bars the trustee from accepting additional contributions of assets, including money, and the IRS relied on that limit in finding no power to vary the investment. See DST repairs, reserves and no new capital.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.